Novacyt is a high growth diagnostics company that has developed innovative technology platforms specifically in liquid-based cytology (LBC) testing and new-generation molecular products based on real-time quantitative polymerase chain reaction (qPCR). Novacyt also has an established manufacturing and global distribution channel, which offers a wide range of profitable infectious disease diagnostic products. 2017 could be a transformative year, as the integration of recent acquisitions helps accelerate sales momentum of its key products NOVAprep (LBC) and Primerdesign’s genesig (qPCR). By targeting wider markets the company aims to achieve EBITDA break-even in 2017.
Organic growth, M&A and R&D
Novacyt, listed on Alternext, is a group of companies that offer novel clinical diagnostics platforms, but also conventional laboratory products. The two most notable recent transactions were the merger of Novacyt with Lab21 in June 2014 and the acquisition of Primerdesign in May 2016. Novacyt’s operations are split into three business segments: cytology – a core business involving innovative LBC diagnostic equipment NOVAprep and consumables; molecular testing – Primerdesign, innovative real-time qPCR equipment and consumables; and diagnostics – laboratory products (Lab21 and its subsidiaries). Novacyt’s strategy has three pillars: commercial expansion of the existing product portfolio, progressing the R&D pipeline to bring innovative products to the market and opportunistic acquisitions of synergistic businesses.
Financials: Strong growth and back to black in 2017
In January 2017 Novacyt reported FY16 sales with the top line growing 25% from €8.9m to €11.1m (38% using a constant exchange rate). Through a combination of organic and acquisitive expansion (Primerdesign has been consolidated from May 2016 and Lab21 from June 2014) sales increased from €1.1m in FY13 to €11.1m in FY16 at a CAGR of 110%. To date Novacyt has been loss making, but the company aims to be profitable in H217 with continued organic growth. During 2016 Novacyt raised a total of €8.1m in new equity and €3.0m in convertible debt and ended the year with €2.9m in cash (net debt of €2.9m using debt at end-June 2016).
Valuation: Undemanding 1.2x EV/sales
Based on the consensus sales estimates for 2017, an EV/sales ratio of just 1.2x seems undemanding. 2017 could be transformational if Novacyt manages to achieve profitability, while dual listing on AIM may also provide additional liquidity. Primerdesign’s expansion into the clinical testing market (see below) is one of the most significant near-term catalysts.
Year
end |
Revenue
(€m) |
PBT
(€m) |
EPS
(€) |
DPS
(c) |
P/E
(x) |
Yield
(x) |
12/14 |
4.5 |
(3.7) |
(0.88) |
0.0 |
N/A |
N/A |
12/15 |
8.9 |
(13.2)* |
(2.05)* |
0.0 |
N/A |
N/A |
12/16e |
11.1 |
(2.1) |
(0.33) |
0.0 |
N/A |
N/A |
12/17e |
15.2 |
(0.8) |
(0.35) |
0.0 |
N/A |
N/A |
Source: Bloomberg. Note: *A goodwill impairment of €9.8m was recorded in 2015.
|
Outlook for Novacyt’s businesses
NOVAprep: Next-generation LBC system
Novacyt was incorporated in Paris, France, in 2006 to develop the next-generation, liquid-based cytology screening system NOVAprep, which was CE marked in 2008; the company listed on Alternext in 2012. The technology platform has recently been approved in China, Russia and Australia, and the vial has been registered as a class I device in the US market while the company is still exploring potential commercial options in the US. NOVAprep is marketed as a next generation LBC system, predominantly for cervical cancer screening, and allows both cellular and molecular analysis from the same specimen. Historically, LBC was revolutionary in an attempt to increase the sensitivity and specificity of the classic Papanicolaou smear (Pap smear) for screening for cervical abnormalities. Instead of spreading the sample onto a glass slide, in LBC the brush is transferred to a vial with a fixative medium, which is then spun and prepared for analysis. NOVAprep’s differentiating properties are a unique, patented vial, a proprietary fixative medium (non-formaldehyde based, no refrigeration, with a longer storage period) and a fully automated preparation process.
In June 2014 Novacyt acquired and merged with Lab21, combining the innovative NOVAprep platform with the profitable infectious disease diagnostics business from Lab21. NOVAprep is still in the early stage of commercialisation, therefore the combination with Lab21 provided synergistic marketing channels and experience, with sales now gaining traction. The company has signed several distribution deals (with MDL Asia for Asia Pacific, Leica for China, Microm Microtech for France and a partnership with Cepheid for South America) and is now selling NOVAprep in Europe, Asia, the Middle East and Australia. NOVAprep’s FY16 sales were €1.6m, up 24% y-o-y, with the Asia region growing the fastest at 116%. In 2017 Novacyt aims to launch NOVAprep in South America through a partnership with Cepheid and recently successfully registered the NOVAprep vial as a class I device with the US FDA.
Primerdesign: An innovative real-time qPCR solution
Primerdesign, acquired in May 2016, is a UK-based molecular diagnostics company that has developed and commercialised a real-time qPCR system called genesig and sells proprietary molecular assays (it has developed a catalogue of around 500 molecular test so far) to academic and industrial customers in over 100 countries. Novacyt paid £9.9m using equity and cash, with another £2.5m in earnouts over the next three years. In our view, a crucial step in the investment case for Primerdesign is the expansion into clinical diagnostics beyond its current research use market. Novacyt has already identified the first six infectious disease assays from Primerdesign’s catalogue and will invest in the work needed to “upgrade” to get the CE mark in 2017. Primerdesign’s sales grew at a CAGR of 32% over the past three years; it recorded FY15 revenues of €5.3m and EBITDA of €1.8m. Novacyt expected the business to be immediately accretive after the acquisition. On a pro forma basis, Primerdesign’s 2016 sales were £4.2m (€5.1m), constituting 46% of the total Novacyt revenues compared to £3.9m (€5.3m) in 2015. Novacyt is making significant investments in Primerdesign’s commercial and regulatory infrastructure and expects growing sales in 2017, which should be boosted by the expansion in clinical diagnostics.
Lab21: An established profitable products business
Lab21 was founded in 2005 and is headquartered in Cambridge, UK. After several acquisitions, Lab21 mainly focuses on infectious diseases and oncology products and consists of three business activities: microbiology and haematology/serology products. Lab21 has a broad client base covered by more than 300 distributors, also employing a direct salesforce in the UK. Lab21 represents an established business within Novacyt, with FY16 sales coming in at €6.2m. This was a decrease of 8% at constant exchange rates, mainly due to a series of one-offs including lumpy tender awards, challenging emerging market conditions and a strong comparator period.
